Most cities in recent decades have copied the modern type of architecture and urban design of the western countries. Modern cities in different regions of the world have been relatively developed with similar urban form types. In this research, it has been suggested to investigate the traditional or vernacular architecture and to propose new design principles based on the historic shape of cities. Thus the paper has been concentrated on vernacular architecture of traditional Iranian cities. The research has been focused on analysing the vernacular architecture of this country and to define the main traditional design principles in scale of urban fabric particularly in residential neighbourhoods. These principles have been adapted to be applicable for the contemporary life style and condition of the Iranian cities. The design proposal has been assessed via an inquiry by design process in order to understand the feasibility and adequacy of the suggested design principles. This research can show the methodology of learning from the traditional architecture and urban design to make new distinctive urban forms. Such urban forms create distinguished local identity for Iranian residential urban fabrics.